Small caps weighed down by bailout bill uncertainty
After kicking off the year’s spookiest month sharply lower, small caps continue to spiral downward, dragged down by the uncertainty surrounding a vote in the Senate today on the proposed $700 billion bailout plan.
At 12:33 p.m. ET, the Russell 2000 (NYSE:IWM) was down 9.61, or 1.41%, at 669.97.
The Senate’s vote carries great weight, as the House voted down a similar version of the bailout bill on Monday. The market rallied Tuesday on hopes that a bailout plan of sorts will be passed soon; however, that rally has faded today, as uncertainty over the bill’s passage has become more prominent. The Senate’s version of the bill would permit the Federal Deposit Insurance Corp. to temporarily increase the amount of insurance it currently offers depositors should banks fail. The Senate will vote on the bill after sunset today due to observance of the Jewish New Year, Rosh Hashanah.
Given that the status of passage of a bailout plan is in limbo, credit markets remain on lock down. Libor, which spiked to 6.875% on Tuesday from 2.569% on Monday, has pulled back today to 4% and change midday. The “Libor” rate was at the highest point since January and the eurozone equivalent was at 14-year highs. Investors continued to pour into treasuries as a safe haven, sending prices higher and yields lower.
“From tax break extenders to alternative energy to an increase in FDIC insurance for deposits up to 250k to authority to suspend mark-to-market accounting, this bill is going to pass the Senate when they vote on it tonight,” Andy Busch, global foreign exchange strategist for BMO Capital Markets, said in an email. “If the U.S. House of Representatives brings this bill up again for a vote, it will pass [because] there’s no way Nancy Pelosi will bring up a bill that will fail because she will lose her job and so will many Democrats in the election. Congress has an extremely low approval rating from the voters now and anything can easily shift sentiment to the other side. I believe that as soon as Pelosi announces a vote, the deal is done.”
Lackluster economic news added to the glum on Wall Street. The ISM Manufacturing Survey came in well below the projection of 49.8 at 43.5. The Street was also focused on the ADP Employment survey, ahead of the big employment report on Friday. The ADP survey registered a decline of 8,000 jobs in August, which was better than the forecasted plunge of 60,000. Though better-than-expected, August’s number was revised downward slightly and traders understand that there is a disconnect between the ADP number and the Labor Department’s upcoming data. A consensus of economists is forecasting the Labor Department will report decline in non-farm payrolls of 100,000 and an unemployment rate of 6.1%.
Earlier in the morning, another private employment report from consulting firm Challenger, Gray and Christmas Inc. showed layoffs rising 7.2% for the month and up 33% from year-ago levels. Analysts with Challenger also said that the fallout from September’s rocky period on Wall Street could be felt in the employment numbers for several weeks to come.
Crude oil is off $3 to $97 a barrel mid-session, after the government reported an unexpected increase in crude supplies. Gold is up $4 per troy ounce and the dollar is mixed midday. The dollar has rallied to $1.4044 against the euro.
“The U.S. dollar is strengthening because the US can coordinate amongst their agencies multiple approaches to solving the credit crunch,” Busch said. “Europe can't even do a deal for Fortis without running into problems from individual governments not approving parts of the plan. This is the difference between a united Europe and the United States. Yes, we're a mess, but there's a benefit to a unified system when dealing with a crisis.”
In large cap headlines, General Electric Co. (NYSE:GE) had skidded almost 8% midday after an analyst downgrade this morning. GE is often seen as a nice proxy for the overall economy, so the dip in GE shares was a negative for a broad swath of industrial and consumer stocks this morning.
In small cap headlines, ICX Technologies Inc. (Nasdaq:ICXT) has jumped 16% midday on news that the firm won a contract from the U.S. Army.
Shares of Xyratex Ltd. (Nasdaq: XRTX) have lost 9% after the provider of enterprise class data storage subsystems posted fiscal third-quarter results after Tuesday’s close below the consensus on Wall Street. Adding to the glum, the company issued also issued fourth-quarter guidance below analysts’ estimates.
Industrial company Actuant Corp. (NYSE: ATU) this morning posted fiscal fourth-quarter revenues that missed the consensus view, while the company met on earnings for the quarter. The picture painted by the company going forward was disconcerting as well, as Actuant guided for fiscal 2009 revenues below the Street with earnings below to above analysts’ estimates. Management anticipated 2009 to be a “challenging year” in light of the tough economic environment, tight credit and a strengthening U.S. dollar. Shares slid 11% midday.
